The European Commission has decided that fiscal
incentives adopted by Sicily in two regional laws are incompatible with EC
Treaty state aid rules. The schemes provide for exemptions from the Italian tax
on regional production activities (IRAP) in favour of companies operating in
certain sectors in Sicily. These tax exemptions would be liable to distort
competition with the EU's Single Market by selectively favouring certain
categories of undertakings and therefore cannot be implemented. As no aid has
yet been granted under these measures, there is no need for the Commission to
ask for recovery.

Competition Commissioner Neelie Kroes said “These two decisions
illustrate my determination to crack down on aid which distorts competition
without promoting growth".

On 6 September 2005 (see IP/05/1102)
and 21 September 2005, the Commission opened a formal investigation into fiscal
incentives adopted by Sicily in its regional laws n° 21 of 29/12/2003 and
n° 17 of 31/12/2004. According to these regional laws, certain new firms
created in 2004 and some existing undertakings can benefit from a 5-year
exemption from paying the IRAP. This concerns new firms which, as of 2004
started operating in the sectors of tourism, hotels, cultural goods,
agricultural feed, information technology and craft activities, plus all new
firms starting their activities in an industrial sector as of 2004 with a
turnover smaller than €10 million. Moreover, the regional laws give
existing firms, except firms operating in the chemical and petrochemical
sectors, a five-year exemption as from 2004 on that part of IRAP which is due on
the share of the tax basis exceeding the average tax basis of the years
2001-2003.

The regional laws also created a so-called 'Euro-Mediterranean Centre of
Finance and Insurance Services'. Under the regional laws, subsidiaries of
financial and insurance companies that operate within the Centre can benefit
from a 50% reduction on the rate of IRAP for activities made within the Centre.
The regional laws also grants cooperatives a reduction in the rate of IRAP by 1%
in 2005, 0.75% in 2006 and 0.5% in 2007. The same benefit can be extended to
security service companies.

In accordance with the Commission's long-standing practice, such measures are
considered to constitute operating aid, as they consist of selective reductions
of taxes normally borne by companies in the course of their business activities.
Operating aid can be declared compatible with the Single Market only in areas
with an abnormally low standard of living or serious underemployment (assisted
areas according to Article 87(3)(a) of the EC Treaty) and, under strict
conditions. None of these conditions are fulfilled in these cases.

During the consultation period following the opening of the inquiries, no
observations whatsoever have been submitted either by the Italian authorities or
by third parties. The Commission can therefore only confirm the doubts raised in
its decisions to open formal investigation procedures and find the proposed
measures incompatible with the Single Market.